Businessweek Archives

Why Detroit Doesn't Need The Protection It Wants

At long last, Detroit's Big Three are singing the same tune on trade issues. Unfortunately, they're all singing Gimme Shelter.

Detroit is about to ask the Clinton Administration to slap duties on some Japanese cars. The auto makers say their rivals are selling autos illegally in the U. S. for less than at home. It's Detroit's second recent volley at Japan. Last year, the Big Three charged Japanese carmakers with dumping minivans in the U. S. The Commerce Dept. agreed, although the International Trade Commission ruled that Detroit wasn't damaged by the dumping and refused to impose punitive duties. Now, Detroit is taking a stab at protecting the car market.

BIG BULGE. No one denies there's a serious problem. Japan's trade surplus with the U. S. last year hit $43.7 billion, up 14%. Cars and auto parts accounted for three-fourths of the total. Nothing new there: Since 1986, Japan's annual trade surplus in the auto sector has hovered around $33 million. "The United States has been exporting free-trade philosophy while Japan has been capturing world markets," complains Harold A. "Red" Poling, CEO of Ford Motor Co.

Maybe. But it doesn't follow that the answer is to erect new trade barriers. In the short run, consumers lose as vehicle prices rise. And over the long haul, companies suffer because they stop innovating and fall behind technologically. Take Fiat. Trade restrictions helped keep the Italian giant's home market share at around 60% as recently as the late 1980s. But as Europe's barriers fell, foreign competitors roared in with products that Italian drivers preferred. Fiat's share of the Italian market skidded to 43% faster than you can say "Honda." Now, Fiat is playing a costly game of catch-up, pledging $29 billion to revamp factories and design new models.

Detroit is also being a bit disin-genuous, considering that U. S.-made pickups have been protected by a 25% tariff for three decades. That has locked out competitors while Detroit racked up billions in profits, much as Japanese companies did at home. The Bush Administration lifted that tariff from imported minivans and Jeep-like vehicles, but carmakers are pressuring Clinton to reinstate it--even though Detroit dominates those segments and it earns up to $8,000 on each sale.

Complaints about dumping also miss the main point: Car prices are too high in Japan. The answer is not to raise car prices in the U. S. but to lower them in Japan through increased competition. The fact is, the high-priced Japanese market constitutes an opportunity for Detroit. Yes, there were import barriers in the past, such as severe tax penalties on owners of larger cars. And Japanese companies did use profits from their home market to subsidize their push overseas. But "Japan has no nontariff barriers now, real or imaginary," says a U. S. auto executive based in Japan. Rather than complain about past practices, the Big Three would do better to push their products harder in Japan.

Chrysler Corp. is the one Detroit company that's taking a serious stab at the Japanese market. It's offering its first right-hand-drive U. S. model, the Jeep Cherokee, and lowering its price by $13,000, to $29,800. But the Cherokee's nine-year-old design is no match for the smooth sophistication of Japanese vehicles. It is possible to sell U. S.-made cars to Japanese buyers--Honda Motor Corp. has shown that with the cars it makes in Marysville, Ohio, and ships to Japan. The difference is that Honda has made the necessary investments in engineering the cars specifically for Japan. Detroit, by contrast, still relies on expensive retrofitting.

For his part, President Clinton can help Detroit without punishing consumers. Unlike his predecessors in the White House, he should demand that the Japanese commit to a timetable for reducing their trade surplus. If those goals aren't met within the time allowed, up go U. S. barriers. He also could back such policies as corporate tax credits for employee training, which helps companies compete over the long run.

DRUBBING. In fact, long-term competitiveness is the best argument against tariffs on Japan. It was, after all, the drubbing from foreign carmakers that forced the Big Three to get their acts together during the 1980s. They swept away layers of unneeded management, whipped factories into shape, and dramatically boosted the quality of U. S. cars and trucks. The results are clear: Last year, Detroit gained back two points of market share--most of it from Japanese rivals. And Ford's Taurus replaced the Honda Accord as the No. 1 seller.

The inescapable fact is, foreign auto makers forced the Big Three to make better cars at better prices. Handicapping the Japanese can't possibly have the same effect.David Woodruff